Family Limited Partnerships

       The most recent appellate case involving family limited partnerships, Estate of Bigelow v. Commissioner, 503 F.3d 955, 2007 WL 2684526 (9th Cir. 2007) deserves careful study for the discussion of the "bona-fide sale for adequate and full consideration," exception to section 2036.

       The Ninth Circuit held that if the consideration exception applies, section 2036 does not apply.  In determining the applicability of the exception, the inherent reduction (such as arises when an investor transfers a stock portfolio to a hedge fund in exchange for an interest therein) of the value of the property transferred cannot per se disqualify the property from failing the 2036(a) exception.  But, the court continues on to state:

"The validity of the adequate and full consideration prong cannot be gauged independently of the non-tax-related business purposes involved in making the bona fide transfer inquiry."

         Estate planners should not assume that the inquiry of subjective motive is necessarily required in measuring the adequacy of the consideration.  In Bongard, 124 T.C. 95 (2005), Judge Halpern, in a concurring opinion, expressed his disagreement with the majority's interpretation of the bona-fide sale exception, as the Judge stated:"

"Therefore, to establish that the transfers were for full consideration, petitioner must, for each transfer, establish that the value of the property transferred by decedent did not exceed the cash value of the property received by him. Id. By the explicit terms of section 25, 2512-8, Gift Tax Regs., the resulting inquiry is limited to an economic calculus, and there is no room for any inquiry as to the transferor's (decedent's) state of mind.  Yet the majority makes his state of mind critical..."

         A more recent Tax Court decision, Estate of Rector, T.C. Memo 2007 367 (2007) involved the creation of an FLP, by a 92-year old woman who was living in a nursing home.  She was the only general partner and her revocable trust held the remaining 98% interest as a limited partner.  Before death, the decedent transferred by a gift a 30% interest of FLP.  Judge Laro had no difficulty in concluding that section 2036 applied and no discount was available.  See also, Estate of Hilde E. Erickson, 2007 T.C. Memo 107 (2007).



That’s the question currently being considered in the Tax Court in what most likely will be a fully reviewed opinion. The facts of the case are as follows, the taxpayer applied to the IRS for innocent spouse relief in August of 2002. The IRS made a final determination denying the requested relief in a letter dated April 27, 2006. This letter gave the taxpayer ninety (90) days in which to file a petition in the ninety-day time frame. Then the decision from the tax court, Billings v. Commissioner, 127 T.C. 7 (2006), which came out in July of 2006 held that the tax court had no jurisdiction over innocent spouse reviews pursuant to § 6015(f). Not until after taxpayer’s ninety-day window closed, did Congress amend § 6015 to specifically grant the tax court jurisdiction over such claims. Prior to that amendment, however, various federal courts had held that the tax court did not have jurisdiction over §6015(f) petitions. See Comm’r v. Ewing, 439 F.3d 1009, 1013 (9th Cir. 2006)(court held that 6015(e) did not grant jurisdiction over 6015(f) petitons); see also Barman v. Commissioner, 446 F.3d 785 (8th Cir. 2006)(same). Taxpayer was thus faced with a situation where the IRS told her that she had to seek review of its decision in the tax court, but federal case law stated that the tax court had no jurisdiction over her claim. The United States District Court for the Southern District of Florida held that the taxpayer’s failure to file a petition in the ninety-day window was excusable, given the uncertainty in the law over this issue. Finding that the ninety-day review period for 6015(f) petition is analogous to the ninety day window for filing a complaint with the EEOC in Title VII cases. In that situation, the Supreme Court has held that the filing window is a “requirement subject to waiver, estoppel, and equitable tolling.” Zipes v. TWA, 455 U.S. 385, 393 (U.S. 1982). Waiver and equitable tolling should also be available to those seeking review of a denial of innocent spouse relief, although like the Title VII cases, it should be granted sparingly. See Baldwin County Welcome Center v. Brown, 466 U.S. 147, 151 (1984).
The Southern District held that the Taxpayer’s situation merited either a waiver of tolling of the ninety-day time period for filing a petition or for review with the tax court. Finding that the uncertain state of the law on the jurisdiction of the tax court at the time taxpayer would have had to file the petition excused her failure to file. Therefore, the Court granted taxpayer thirty days from the date of the order to file a petition for review of her denial of innocent spouse relief under § 6015(f) with the tax court.

The taxpayer then filed a petition in the Tax Court in which the IRS responded with a motion to dismiss for lack of jurisdiction. In December of 2007 the Tax Court in Miami heard oral arguments as to why equitable tolling should apply to the 90 day window in this particular § 6015(f) innocent spouse case. Tax Court Judge Holmes indicated that the issue is a complicated one that his colleagues might want to take to conference.